The Problem of Food Inflation

Context:

India has been witnessing a continued growth in the GDP, but the core inflation seems set on a downward trajectory. The food inflation has stayed stubbornly elevated, restricting the fall in the consumer price index (CPI).

• Food commands nearly 40 per cent weight in the CPI basket.
• Major factors that lead to food inflation is uncertain monsoon, weather shocks such as heatwaves and unseasonal rains. Further, the climate change has further increased the frequency of such shocks.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. Calculation of Food Inflation in India
2. Factors Contributing to India’s Elevated Food Inflation
3. Strategies to Address Food Inflation Effectively
4. About the Consumer Food Price Index (CFPI)

Calculation of Food Inflation in India:

• Consumer Price Index (CPI) for Food and Beverages: Food inflation in India is primarily measured by the Consumer Price Index (CPI) for Food and Beverages. CPI tracks changes in the prices paid by typical consumers for a basket of goods and services over time.
• Weightage in CPI: Food has a weight of 45.9% in the consumer price index. However, its contribution to overall inflation has increased significantly, from 48% in April 2022 to 67% in November 2023.
• Household Consumption Survey: The government’s Household Consumption Survey revealed that food’s share of the rural consumption basket fell below 50% for the first time to 46% and to 39% for urban consumers.
• Factors Influencing Food Inflation: About 90% of food inflation is determined by non-cyclical factors such as weather conditions, supply conditions, international prices, and availability. However, demand factors also play a role, contributing to about 10% of food inflation with significant time variation.

Factors Contributing to India’s Elevated Food Inflation:

Temperature and Weather Challenges:

• Adverse weather conditions, including predictions of a weak monsoon and heatwaves, have affected crop yields, particularly for cereals, pulses, and sugar, which require significant water for growth.
• This has led to supply shortages and higher domestic prices, with cereal and pulse inflation showing double-digit increases in April 2024.
• The MPC, with a 4-2 majority vote, emphasized its focus on withdrawing accommodation to align inflation progressively to the 4% target, noting the difficulty in achieving this amid increasing climate-related supply shocks. The CMIE attributed the rise in fruit and vegetable prices to last month’s heatwaves.

Fuel Prices:

• Fuel prices, a critical input in agriculture, have significantly increased in recent years.
• A 1% increase in fuel inflation results in a 0.13% rise in food inflation, with the impact gradually diminishing over the next 12 months.

Supply Chain Disruptions:

• Disruptions in the supply chain, due to transportation constraints, labor shortages, and logistical challenges, have reduced the availability of food products, leading to price hikes.
• Vegetables have continued to experience double-digit inflation for six consecutive months, reaching 27.8%, exacerbated by the lack of efficient storage facilities, which leads to the wastage of perishable items.

Global Effects:

• Despite a decrease in global food prices, India’s food prices remain high due to limited transmission of international prices to domestic markets.
• The Russia-Ukraine war has acted as a deterrent, affecting imports. India heavily depends on imports for edible oils (60% of consumption) and pulses, while for most other agricultural commodities like cereals, sugar, dairy, fruits, and vegetables, it is an exporter.
• Food inflation, measured by the Consumer Food Price Index, rose to a provisional 8.7% in April from 8.52% in March.

Other Factors Contributing to Inflation:

• The MPC is acutely aware that, beyond the threat from rising food costs—which are vulnerable to the low water storage levels in the country’s reservoirs and the ongoing exceptionally hot summer—escalating prices of industrial metals could disrupt the deflationary trend in core inflation.
• Additionally, the uncertain outlook for crude oil prices, due to tensions in West Asia and output cuts by OPEC+ nations, adds to the uncertainty of the inflation path.

Strategies to Address Food Inflation Effectively:

• Investment in Agricultural Infrastructure and Technology: Improving agricultural infrastructure, adopting advanced technology, and investing in research can enhance crop yields and reduce production costs, boosting supply and stabilizing prices.
• Enhancing Logistics and Storage Facilities: Improving logistics, storage facilities, and distribution networks can reduce wastage and ensure a steady supply of food items to the market, mitigating price fluctuations.
• Promoting Crop Diversification: Encouraging the cultivation of a variety of crops and supporting alternative farming practices can reduce reliance on a few commodities, thereby balancing market dynamics and reducing price volatility.
• Regular Monitoring and Price Regulation: Regular monitoring of food prices and implementing effective price regulation mechanisms can prevent price manipulation and ensure fair pricing for consumers and producers.
• Addressing Climate Change Challenges: Implementing sustainable farming practices, efficient water management strategies, and promoting crop diversification can help mitigate the impact of climate change on agriculture, reducing production risks and enhancing long-term food security.

About the Consumer Food Price Index (CFPI):

• Definition: The Consumer Food Price Index (CFPI) measures the change in retail prices of food items consumed by the population.
• Purpose: It is a specific measure of inflation focusing solely on the price changes of food items in a consumer’s basket of goods and services.
• Usage: The CFPI is a sub-component of the broader Consumer Price Index (CPI) and is utilized by the Reserve Bank of India (RBI) to monitor inflation.
• Release: The Central Statistics Office (CSO), under the Ministry of Statistics and Programme Implementation (MOSPI), began releasing CFPI data for three categories—rural, urban, and combined—separately on an all-India basis from May 2014.
• Methodology: Similar to the Consumer Price Index (CPI), the CFPI is calculated monthly using the same methodology.
  • The current base year used is 2012.
  • The CSO revised the base year for CPI and CFPI from 2010 to 2012 in January 2015.

-Source: Indian Express